Metric puts "one more year" in perspective

[Fean]

I've really been struggling with one-more-year (OMY) syndrome recently. From what I've seen on the board's recently, I'm not alone. The market run-up probably has a lot to do with that -- I can practically taste my freedom

I was playing with a spreadsheet the other day and found something that helped me put OMY in perspective. I thought it may be of general interest so I'm posting it here.

Until recently, I have always thought of OMY from the perspective of "If I work one more year, I'll be able to spend X additional dollars (after tax and adjusted for inflation) every year for the rest of my life." The value of X essentially told me how much my annual budget (or buffer) could increase for the rest of my life. That is a useful metric and it's been useful to me over the years.

However, it is hard for me to put a price tag on the value of an entire year of my life and that makes it very difficult for me to keep things in perspective. I now break things down into smaller time periods that are easier for me to comprehend. For example, my current spreadsheet tells me that each week I work this year will allow me to spend $1 (after tax and adjusted for inflation) every week the rest of my life.

Is an additional $1/week for life really worth dealing with my current j*b for this week? That's something concrete that I can really wrap my mind around when I get up Monday morning and dread heading to the office.

You can do similar calculations for other time periods too. For example, each day I work will let me spend an additional ~2 cents each day for the rest of my life. How much is a day of your life really worth? This was the calculation that really opened my eyes.

The formulas I used are:

• $ per day per day = (total $ you would save in one year) / 365 * (withdrawal rate %) * (1 - tax rate %) / 365
• $ per week per week = (total $ you would save in one year) / 365 * (withdrawal rate %) * (1 - tax rate %) / 365 * 7 * 7

-Fean

 

[Running_Man]

You not only have the money you save you also have the money you didn't spend so you would have to add that to the total as well, even if you were keeping the withdrawl rate the same.

 

[EvrClrx311]

I like it, that's an interesting way to look at things. Unfortunately for me, it would have the opposite effect. "If I only work for 5 more days... that means I get an extra < insert something that costs $1 here > every week for the rest of my life!?" with 52 weeks in a year and 30+ years to go after retirement... that might entice me to work that extra week. And then the next one.

I'm hoping FI comes before I am met with this decision... so my desire to retire won't be $$$ related, but rather because I get bored/tired of my job.

 

[Independent]

I used to sit in boring meetings and calculate that one day of work funded two days that I could spend traveling after I retired. That was more meaningful to me than $_ per day.

If I've already saved enough to fund my needs for my life, then additional savings must go for wants. Wants don't need to be spread out uniformly over my remaining life.

And, I assumed after-tax earnings = marginal after-tax savings. Our normal expenses would have been the same whether I was working or retired, so the marginal impact of a $100 after-tax earnings is $100 of after-tax savings.

 

[traineeinvestor]

While that's certainly one way to look at the issue, for me OMY (x2) was not about spending more - it was about reducing the risk of either having to go and look for a job later in life or suffer a reduction in lifestyle should things not go as planned. I might regret the extra year or two in the w*rkforce, but I will sleep a lot easier.

 

[RunningBum]

Not that I'm in favor of One More Year, but OMY doesn't just let you pad your nest egg, it also keeps you from dipping into that nest egg for all of your living expenses for that year.

 

[Fean]

You not only have the money you save you also have the money you didn't spend so you would have to add that to the total as well, even if you were keeping the withdrawl rate the same.

Thanks for the clarification. I agree with you completely. The original post wasn't clear about what I meant by the savings for that year. I know what I expect my portfolio balance to be at the end of the year both with and without working that year. The difference between those two values is what I meant by the additional savings I'd have if I worked for OMY.

 

[RunningBum]

Your number seems low. Very low. Too low?

I went through this exercise in my final year or two, but with a simpler formula. I can't remember the actual numbers, but I think it was around 50-60K for an extra year. I based this on my take home pay, plus maxing out my 401K + match, discounted ESPP stock, health care subsidy, and vacation accrued (which I could cash out when I left).

Say $52K for simplicity. That's $1000/week. With a 4% SWR, that's $40/week every year for the rest of my life. Take out taxes of about 20%, and that becomes $32/week.

Did I really save 32X more than you did (less any differences in SWR or taxes), or did one of us get the math wrong? I can't really figure out your formula (maybe I could if I took the time) to say whether there's a problem with it.

 

[Meadbh]

I think there is a problem with the second formula. The divisor has two terms of 7 in it, meaning that the final result is only 1/7 of that intended for a weekly result. I'm sure that's a typo which can be corrected.

 

[Live And Learn]

If I've already saved enough to fund my needs for my life, then additional savings must go for wants. Wants don't need to be spread out uniformly over my remaining life.

Yep - I do that just about every single morning ! "Ok, so because I'm working today I get to spend an extra $400 later on".

it was about reducing the risk of either having to go and look for a job later in life or suffer a reduction in lifestyle should things not go as planned. I might regret the extra year or two in the w*rkforce, but I will sleep a lot easier.

Been there done that too ! Thats another one I run through almost every day. "If I work OMY I can reduce my risk of failure from 12% to 9%; if I work TWO more years it goes to 5% !!!"

Say $52K for simplicity. That's $1000/week. With a 4% SWR, that's $40/week every year for the rest of my life. Take out taxes of about 20%, and that becomes $32/week.

Ok, so that extra $32 a week for life is worth OMY to me. Thats an extra round of golf per week, or an extra day at the zoo.

On the other hand ... I hate getting up in the morning because of my j*b so that's the compromise I deal with daily

 

[Fean]

Say $52K for simplicity. That's $1000/week. With a 4% SWR, that's $40/week every year for the rest of my life. Take out taxes of about 20%, and that becomes $32/week.

Did I really save 32X more than you did (less any differences in SWR or taxes), or did one of us get the math wrong? I can't really figure out your formula (maybe I could if I took the time) to say whether there's a problem with it.

If you "save" $1000 for one week's worth of work, then a 4% annual WR would yield $40 per year off of that money. To calculate how much you could spend each week, you would need to divide $40 by 52 which would be ~77 cents before taxes.

My numbers are a little different (higher "savings" number, much lower target WR, lower tax rate) but it's in the right ballpark.

-Fean

 

[Fean]

I think there is a problem with the second formula. The divisor has two terms of 7 in it, meaning that the final result is only 1/7 of that intended for a weekly result. I'm sure that's a typo which can be corrected.

The first formula calculates $/day per day. The second calculates $/week per week. There are two "per week" terms which is why you have two terms of 7.

It may be easier if first look at the first formula which tells you how much interest 1 day's worth of work will generate each day indefinitely. The second formula starts there and then looks at a week's worth of work (multiply by 7) and a week's worth of interest (another multiplication by 7.)

I think the formula is correct, but I'll happily be proven wrong -- especially if my interpretation is too low

-Fean

 

[Fean]

Ok, so that extra $32 a week for life is worth OMY to me. Thats an extra round of golf per week, or an extra day at the zoo.

On the other hand ... I hate getting up in the morning because of my j*b so that's the compromise I deal with daily

I believe that the $32/week figure isn't quite right. That example is actually showing that working one additional week will give you $32 / year the rest of your life, not $32 / week.

I'd view OMY a lot differently if working one week would generate an extra $32/week indefinitely. Alas, I don't believe that is the case.

-Fean

 

[RunningBum]

I believe that the $32/week figure isn't quite right. That example is actually showing that working one additional week will give you $32 / year the rest of your life, not $32 / week.

I'd view OMY a lot differently if working one week would generate an extra $32/week indefinitely. Alas, I don't believe that is the case.

-Fean

No, it's $32/week. I divided the $52K by 52 weeks to convert from years to weeks first. If you want to multiply by .04 first, 52K * .04 = $2080/yr, which is $32/week.

 

[Fean]

No, it's $32/week. I divided the $52K by 52 weeks to convert from years to weeks first. If you want to multiply by .04 first, 52K * .04 = $2080/yr, which is $32/week.

Thanks RunningBum. I'm not trying to be argumentative...I think we are looking at two different metrics.

In your example, someone is able to save $1000/week. As a result, if you work for 1 week then a 4% annual WR would give you $40 / year before taxes or $32 / year after taxes. In other words, one week of work will generate $32 / year of interest going forward.

-Fean

 

[RunningBum]

Thanks RunningBum. I'm not trying to be argumentative...I think we are looking at two different metrics.

In your example, someone is able to save $1000/week. As a result, if you work for 1 week then a 4% annual WR would give you $40 / year before taxes or $32 / year after taxes. In other words, one week of work will generate $32 / year of interest going forward.

-Fean

No, that's wrong. You converted from per week to per year for no reason. And if you just think about the numbers, there's no way that $52,000 is only going to create an annual revenue of $32. That's less than 1/10th of 1 percent.

 

[UserRequested]

Every week I work , that's 1 week closer to retirement

T minus 192 and counting

 

[ERhoosier]

Not that I'm in favor of One More Year, but OMY doesn't just let you pad your nest egg, it also keeps you from dipping into that nest egg for all of your living expenses for that year.

Unless you are so frugal &/or FI that your investment returns already cover your base living expenses. FIRECalc success already >>100% Then OMY translates directly into more $$$ to spend during ER (e.g. vacations, cars, etc.). Perhaps that OMY $$$ might be saved for special big bucket-list item like round-the-world cruise. Others might feel that OMY is best spent living vs w@rking. For those lucky enough to be in that 'very' FI position, it's quite personal decision.

 

[Fean]

No, that's wrong. You converted from per week to per year for no reason. And if you just think about the numbers, there's no way that $52,000 is only going to create an annual revenue of $32. That's less than 1/10th of 1 percent.

In the example given ($52k saved per year, 4% annual WR, 20% tax rate):

1 year of work = $52,000 saved = $2080/year interest before tax = $1664/year interest after tax

1 week of work = $1000 saved = $40/year interest before tax = $32/year interest after tax

1 week of work does not generate $32/week interest after tax. It generates $1000 which corresponds to $32 of interest every year, not $32 of interest every week.

We must be using different terminology or working off of different assumptions. I suspect that you are continuing to think of interest in annual terms. The OP referred to the interest generated each week. In other words, working 1 week generates $X of interest each week indefinitely. I realize that this isn't the standard way of viewing things. That is one of the reasons I started this thread. Thinking about how working 1 additional day or 1 additional week affects my daily or weekly spending capacity in the future helps me keep OMY in perspective. Maybe this isn't a useful technique for other people though. Perhaps there is a reason I've never seen anyone else think about it in these terms

Regardless, I appreciate your feedback and input. Any confusion regarding this thread is almost certainly due to my failure to communicate the issue properly in the original post.

-Fean

 

[obgyn65]

Interesting concept. However, how do you factor in your "mortality credit" ? A similar amount of money saved at age 20 or 50 will have a very different impact on your "$ per day" or "$ per week".

$ per day per day = (total $ you would save in one year) / 365 * (withdrawal rate %) * (1 - tax rate %) / 365

• $ per week per week = (total $ you would save in one year) / 365 * (withdrawal rate %) * (1 - tax rate %) / 365 * 7 * 7

-Fean

 

[RunningBum]

In the example given ($52k saved per year, 4% annual WR, 20% tax rate):

1 year of work = $52,000 saved = $2080/year interest before tax = $1664/year interest after tax

1 week of work = $1000 saved = $40/year interest before tax = $32/year interest after tax

1 week of work does not generate $32/week interest after tax. It generates $1000 which corresponds to $32 of interest every year, not $32 of interest every week.

We must be using different terminology or working off of different assumptions. I suspect that you are continuing to think of interest in annual terms. The OP referred to the interest generated each week. In other words, working 1 week generates $X of interest each week indefinitely. I realize that this isn't the standard way of viewing things. That is one of the reasons I started this thread. Thinking about how working 1 additional day or 1 additional week affects my daily or weekly spending capacity in the future helps me keep OMY in perspective. Maybe this isn't a useful technique for other people though. Perhaps there is a reason I've never seen anyone else think about it in these terms

Regardless, I appreciate your feedback and input. Any confusion regarding this thread is almost certainly due to my failure to communicate the issue properly in the original post.

-Fean

OK, yes, I was wrong, you are right. I was thinking in terms of working that full year. You explained it fine, I just didn't wrap my head around the concept of "what does this day/week do for me?" My fault.

 

[Fean]

Interesting concept. However, how do you factor in your "mortality credit" ? A similar amount of money saved at age 20 or 50 will have a very different impact on your "$ per day" or "$ per week".

This approach is really only a reasonable approximation if you are in "one-more-year" mode trying to build up a bigger budget and/or buffer. I wouldn't recommend it if you are a long way from retirement for exactly the reason you listed.

-Fean

 

[JoeWras]

Not that I'm in favor of One More Year, but OMY doesn't just let you pad your nest egg, it also keeps you from dipping into that nest egg for all of your living expenses for that year.

That's what I'm struggling with.

I've hit "my number". Run it anyway you want, and we're FI. The market run up helped. Perhaps that's on my mind too. If I retire today, and we get that 20% drop, uh-oh, it will be on the edge again.